Understanding the markets: Three survival strategies for crisis times
Today's Financial News - Posted September 18, 2008
The financial markets are in disarray. Take advantage of the downturn to buy stocks at deep discounts and shore up your asset allocation. But most importantly of all, do not pull any money from the market. This is a chance to make some serious gains.
By Andrew Snyder
Baltimore (TFN) – What if I were to suddenly give you $50,000 in cash? Would you buy a new boat? Bury the cash under the 200-year-old oak tree in your backyard? Or would you follow the sage advice of nearly every wealth advisor and invest the newfound money using a proper allocation scheme?
Each choice has its own unique downside. New boats can sink. Squirrels love to eat anything around an old oak tree. And following a tried-and-true investment strategy will undoubtedly boost you into a higher tax rate.
The markets are in turmoil this week and investors are scared. They have plenty of reasons to be scared. Foremost, nearly a $100 billion in investor equity has vanished. It is gone forever. Because that money was never more than a list of over-inflated assets on a few banks’ books, it will never be seen again.
But that is in the past. You have money to invest today.
To be quite candid, I am glad Wall Street is in turmoil. We all knew it was going to happen. And we all knew it was going to be bad.
With it finally behind us, we can pick up the pieces and move on. It is a great relief to have all those bad apples cleared from the orchard. Now the rest of the market can grow and prosper.
Building a stronger foundation
I am not one to dwell on the past (I hated history class), so let’s figure out how to make some money.
Let’s take that $50,000 I gave you and turn it into something extraordinary. First, every investor must start with a solid cash position. Most professionals recommend a cash allocation of ten percent.
Remember, a cash position does not mean a pile of “Franklins” under your bed. It can be anything from a savings account, a certificate of deposit, treasury bills, or a money market account. All of these offer security and at least a bit of appreciation potential. As always, the higher the interest rate, the better the investment.
I know money markets are making headlines over the past few days after the Reserve Prime Fund announced it “broke the buck,” but it is nothing you and I need to worry about. No retail-level accounts are in danger, and most accounts (if issued through a bank) are FDIC insured.
If you have a money market account keep your money where it is.
Having a “stash of cash” is key to proper allocation. No matter what you have heard on the news, having your greenbacks in an interest-bearing account is always safer and more profitable than keeping it at home. In an account, you can be assured it will not be stolen, burned, accidentally spent, or eaten by hungry squirrels.
Best Bank
One of the best-run, most generous, and easy to deal with banks we have encountered over the years is EverBank. I admit we’re biased: We’ve been recommending them since the late 1980’s, when they were Mark Twain Bank and one of the few financial institutions who offered foreign-currency accounts to U.S. investors.
EverBank will offer some of the highest yields in the country on their FreeNet Checking and Money Market accounts. While most banks are hunkering down, slashing rates, laying off employees, EverBank is charging ahead. In fact, they’re taking on the punch-drunk competition by offering some of the best rates in the country.
Rates on their FreeNet Checking account and Money Market accounts is always among the highest in the nation. And their 1-year CD rate usually is ahead of most other banks. (Check out their FreeNet Checking, Money Market and Domestic CD’s here.)
Moving on up
After creating an appropriate safety net, it is time to start taking risks. Advisors recommend taking baby steps into the world of risk by purchasing bonds. Most pros recommend an average of thirty percent of your total portfolio should be devoted to bonds. The figure could be more or less depending on your risk tolerance and income levels.
There are all sorts of bonds available to investors, ranging from inflation-protected government-issued notes to high-risk bonds issued by corporations and municipalities.
With the stock market in flux, there are some great bond-buying opportunities. Short-term interest rates have plummeted, forcing bond prices higher, while long-term rates remained relatively unchanged. This widening of the yield curve creates fantastic opportunities.
I could list dozens of bonds for your portfolio, but for now I am recommending a unique short-term bond ETF that trades on the New York Stock Exchange. If you need to boost your portfolio’s bond allocation, buy shares of Vanguard’s Short-term Bond Fund (NYSE:BSV). It is relatively safe and offers a sizeable annual dividend, currently 4%. Best of all, with a listing on a major exchange, shares are easy to purchase.
Getting equitable
With the remaining sixty percent of your portfolio, you need to be targeting maximum appreciation. To do this, head to the stock market. The equities market has taken a nasty blow to the chin over the last few days. It hurts, but it creates a fantastic opportunity to strike back.
With the exception of the financial sector, the market is making predictable moves. Bad earnings reports still drive down share price. Dividends are still paid on profits. And news of a big product breakthrough still makes shares soar in value. In other words, traditional investing metrics still work.
Best of all, with the market making wild daily swings, the profit potential is larger than ever. You merely have to pay attention to what is going on and take advantage of the opportunities as they become available.
Prime example… just yesterday I recommended shares of a telecom based in Russia that saw its share price needlessly pulled down by the collapse in the nation’s financial industry.
I dug through the company’s statements, realized it deserved a much higher share price and told everybody I could to buy shares. Today, share price soared and the folks that followed my advice made a profit of nearly 40% in just a day.
The stock market can make you rich. That is why we recommend you devote such a large percentage of your portfolio to it.
The news makes the stock market a scary place to be right now, but the worst is behind us. Now, shares of all sorts of companies are selling at bargain basement prices. You need to be out there buying shares, waiting for things to turn around. If you sit on the sidelines, you are going to miss some of the biggest profit opportunities of our lifetimes. And you will regret it.
To recap, do not pull all your money from the cash markets or the stock markets. Do just the opposite. This is the perfect time to be adding to your positions and ensuring your portfolio is properly allocated amongst the cash, bond, and equity markets.
If you follow my advice, I have little doubt you will be able double the $50,000 I mentioned above in less than two years. In short, here’s how you do it:
Put $5,000 into a high-yield savings or money-market account. Put $15,000 into the bond market. Look at treasuries and corporate bonds, and invest in the fund I mention above. Finally, put the remaining $30,000 in the equities market, paying special attention to the stocks that have been needlessly hammered by the recent turmoil on Wall Street. Within just two years, your money could easily double.
This is a perfect opportunity to rake in some serious profits. The market has made its plunge and is poised to head back into positive territory. It will be a bumpy road, but if you can hang on and go along for the ride, I am certain you will be glad you did.
And you know what else you should do? Subscribe to our free TFN eNews. This we, we can alert you to sudden profit opportunities as they arise!
Next Article: Lock in huge profits: Sell Mechel (MTL), Vimpel (VIP) and Nortel (NT)
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